Avoiding Knee-Jerk Reactions To Negative Financial Events

Market volatility is a normal part of investing, but even those who know this can get nervous during a market dip. It’s important to keep this initial wave of negativity from leading you to make rash decisions that could damage your nest egg.

Dr. Martin Seay, Ph.D., CFP® is a specialist in positive psychology, which focuses on strategies that people can use to improve their sense of well-being. Dr. Seay’s ABCDE method can help you work through your reactions to distressing financial news and arrive at a positive outcome. Let’s walk through an example of how to use this method to avoid making a bad, emotion-based financial decision.

A = Activating Event

Sometimes stress and anxiety can feel all-encompassing. Dr. Seay believes it’s important that we pinpoint the event that triggered our negative feelings. While you might feel general anxiety about your finances, drill down a little deeper. Is your job secure? OK. Are you saving and investing according to your financial plan? Good.

Did you just see or read a headline that today’s market correction was “THE BIGGEST ONE-DAY DROP IN HISTORY!” Ahh, there it is. Let’s move on to the next step.

B = Belief

Market volatility can rouse some of our worst instincts about investing. We might fall back on long-buried beliefs like, “This game is rigged!” We might feel like we’ve entrusted our financial future to powers beyond our control.

As you work through this step, it’s important to ask yourself where your beliefs come from. Have you been unsettled by widespread media coverage of major financial problems, like the 2008-2009 housing crisis? Have you had negative interactions with the finance industry in the past? Perhaps one of your parents distrusted the markets or made a poor investment that had a negative impact on your family.

Figuring out why you believe what you believe about the markets can help alert you before you fall back into bad financial habits.

C = Consequences

Panicked investors who can’t shake negative beliefs about the markets often make poor decisions during downturns. They think they need to “get out fast” to avoid more negative consequences, like further losses. Ironically, cashing out your investments during a market correction usually leads to far more serious consequences in the long run. How can you stay focused on the big picture?

D = Disputation

Use what you know to push back a little against what you believe.

The historical, long-term trajectory of the financial markets has been to rise over time. At the moment, market averages are near all-time highs. Therefore, when the market does have a temporary drop, we might say, “The Dow was down x hundreds of points today.” It sounds like a big number, but as a percentage, it may just be normal volatility.

In addition, “market timing” strategies usually just don’t work. That’s why your portfolio is diversified, balanced, and strategically rebalanced as necessary. Decades of market history have shown that sticking to this type of investment strategy may be more effective—and stable—than trying to jump in and out of the market based on what’s happening in the news right now.

E = Energized

It’s amazing how simply reminding ourselves of what we know to be true can make us feel better about a negative situation. Hopefully, at the end of this process, you feel a renewed sense of positivity about this present moment and your financial future.

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